10. The present form of
economic regulation of the utilities in the UK is coeval with
their privatisation. The long titles of the Telecommunications
Act 1984, the Gas Act 1986, the Electricity Act 1989, the Water
Act 1991 and the Railways Act 1993 all begin with a declaration
that the Act is to establish the appointment and functions of
a Director General.
11. The system of arm's
length economic regulation by Directors General independent of
the Government was intended, the Department of Trade and Industry
(DTI) told us, to leave the management of the privatised companies
free, without Government interference, "to promote ... a
competitive market and to protect the interests of consumers in
those areas where competition has not yet developed, or where
natural monopoly is likely to remain", without Government
interference. They added "an effective regulatory regime
was ... necessary ... to secure increased efficiency, lower prices,
and better quality by promoting competition and protecting consumers'
interests in markets which were dominated by powerful incumbents,
and in which there remained large elements of monopoly".[4]
Such a summary suggests that regulation might be regarded as
a substitute for competition; indeed some members of the Royal
Academy of Engineering suggested that regulation "should
be seen as a temporary phase, necessary only until the appropriate
market-based mechanisms are put in place".[5]
All other evidence, however, was based on the premise that, for
the foreseeable future, regulation would be necessary in respect
of the monopoly elements of the businesses (the pipes and wires)
and to protect certain disadvantaged groups of consumers. We
agree.
12. There is currently one
mainland regulator for gas, the Director General of Gas Supply
(DGGS) and one for electricity, the Director General of Electricity
Supply (DGES). Electricity regulation in Scotland, where the
electricity industry is structured otherwise than in England and
Wales, is handled by a regional branch of the Office of Electricity
Supply (OFFER) and in Northern Ireland the Director General of
Electricity Supply for Northern Ireland now deals with both electricity
and the embryonic gas supply industry.
13. As a means to fulfilling
their duties, each regulator sets the maximum prices which may
be charged by regulated companies. The first price controls after
privatisation, in gas and electricity, were set by the Government,
with subsequent ones being set periodically by the regulators,
typically for 4 or 5 years but varying from industry to industry
and company to company. The formula chosen by the Government
was broadly that price increases should be no more than the increase
in the retail price index (RPI) over the period, plus or (more
usually) minus a certain percentage colloquially known as `X'
(see para 35). The regulators have maintained that system.
14. As the United Gas Company
told us "the electricity and gas industries are similar in
overall concept in that they both comprise a commodity supply
business through a regulated transportation medium. However,
there are substantial differences".[6]
They have different structures, resulting from the way in which
they were privatised.
15. British Gas was privatised
as a single entity, split into six divisions in 1994[7]
and has now demerged to form two principal companies, BG, whose
major asset is the pipeline network called TransCo, and Centrica,
providing the British Gas services and the shops and energy centres.[8]
16. The players in the privatised
electricity industry were more numerous from the start. Following
the original privatisation there existed in England and Wales:
-- Two
privatised generating companies, National Power and PowerGen;
-- One
(nuclear) generating company, which remained in public ownership
until July 1996 when the greater part of it was privatised as
British Energy;
-- Twelve
Regional Electricity Companies (RECs) each of which had at the
time a local monopoly of supply in its area for customers with
an annual consumption below 1 megawatt (MW) and which was responsible
for the local distribution network;
-- National
Grid Company plc (NGC), the national transmission system, originally
owned by the RECs collectively but subsequently separately floated
as the National Grid Group.
Following privatisation there
existed, in Scotland:
-- Two
privatised vertically-integrated companies, ScottishPower and
Scottish Hydro-Electric;
-- Scottish
Nuclear, which was then publicly owned.
17. It can be seen that
the elements of generation, transmission, distribution and supply
were differently distributed in the two industries; as United
Gas explained "in the case of electricity, regulated distribution
and supply companies were created as single entities whereas in
gas, regulated distribution and supply was further combined with
non-regulated upstream business (supply, exploration and production,
(etc))".[9]
Differences between regulatory experiences can be attributed
in part to the different shapes of the industries and to the differing
chronologies.
18. In the years since privatisation,
competition has been progressively established in varying degrees,
in both the gas and electricity industries. (For a discussion
of this and of the effect on the extent of regulation, see paras.
79-96 below.)
19. The early history of
regulation in gas was characterised by acrimonious relations between
British Gas and the regulator. Trials of strength between that
company and the regulator are still proceeding, as evidenced by
the dispute over the TransCo price formula.[10]
In electricity there seems never to have been quite the same
level of animosity, a circumstance the current DGES Professor
Stephen Littlechild, attributed to chronological accident, saying
"I think ... in the electricity industry they had seen some
of the conflicts elsewhere and they said basically `we are not
going to have that kind of conflict with the regulator'".[11]
In both cases disputes have been characterised by appeals to
the media and a certain personalisation of the argument.[12]
4 Ev. p.316. Back
5 Mem. p.100. Back
6 Ev. p.22. Back
7 Q.900. Back
8 Q.1075. Back
9 Ev. p.20. Back
10 QQ.14,
901. Back
11 Q.1059. Back
12 Ev.
p.23. Back
